Offshore banking: how to carry out due diligence on offshore banks

Good, so you have decided to open a bank account. He has investigated and found some banking ‘possibilities’. They look good to you, and you seem acceptable to them. With that first hurdle cleared, you need to apply a few more selection criteria. When choosing an offshore bank, there are two main factors you need to consider (besides, of course, privacy and confidentiality).

• Stability: is it a well established solvent bank?
• Quality of service: are they fast and efficient?

Stability

Due diligence and KYB (“Know Your Banker”) are essential. He does not make sense to jump from the frying pan into the fire.

There’s no reason to keep your hard-earned money from your tax man or greedy ex-spouse, only to have it disappear into a virtual black hole when your offshore bank closes its doors. You also don’t want your investment manager wasting your money on “hot” deals that never work but bring you huge commissions.

These days with the Internet, it is relatively easy for anyone to set up a bank. You need a license, but jurisdictions you hardly knew existed, like Montenegro or Somalia, for a fee, will provide all comers with a valid government-issued banking license. Try to avoid banking in these high-risk areas, as they attract too many scammers and dreamers. Before you invest money, make sure the bank you’re investing in is run by professional bankers and not by an Eastern European teenager with good programming and web design skills, who decided last month that it would be profitable to be president of a bank.

Most offshore financial houses seem solid until they unexpectedly collapse. The Marc Harris Organization in Panama attracted many clients. Marc Harris is currently serving a long jail sentence in Florida. Bank Crozier of Grenada and St Lucia, run by Swedes, also seemed very professional. Paritate Bank in Latvia impressed many people with innovative products, flexibility, and good customer service. Now they are all missing. They all went under, taking their clients’ money with them. (Actually, Paritate is back up and running, but the former investors never got their money back.)

Another thing to consider when reviewing Internet sites for banks in exotic locations: any banks anywhere that attract shady characters will (sooner rather than later) be shut down by regulators. You don’t want your hard earned money getting mixed up in such ugly masses. So stay away from banks that explicitly encourage you to hide your money.

It is almost unheard of for big banks in civilized and well regulated first world financial centers like Luxembourg to be corrupt from top to bottom. But of course, even the unlikely can happen! That is exactly what happened not many years ago with the Bank of Credit and Commerce International (BCCI) which was registered in the UK and Luxembourg.

The bottom line is that due diligence is important. Most of the offshore banks are highly reputable, stable, well managed and professional. It’s the ones that aren’t the ones that grab the headlines. But it’s important to ask questions until you feel completely comfortable, and to ask for second opinions (from people who know what they’re talking about) if you don’t feel totally confident in your own knowledge abroad. Don’t believe everything you read on the net or in a glossy brochure. Always ask for a copy of the annual report to begin with, and if you don’t feel confident reviewing it yourself, ask a professional such as an accountant or financial adviser. Then do Internet searches using the bank’s name and SWIFT code, which should turn up any negative comments or involvement in dubious deals.

Quality of service

“Different strokes for different people,” they call it. You’d be surprised how quality service means so many different things to different people. For some, it might be a friendly old Swiss banker who will buy you lunch, give you a nice golf umbrella and chat for a few hours. He will want to learn everything about your financial, business and social situation.

Other people may prefer a banker who just does what he’s told and never suggests that you have face-to-face meetings. He may prefer that his banker not even know what he looks like. Maybe all he wants is a nice internet interface so he can send or withdraw money in the middle of the night if he wants, with super-smooth technological efficiency.

Some people love that their personal banker knows and trusts them enough to move six or seven figures with a single phone call or email. This would surprise other of my clients who want to log in first through a five step encrypted security system with three passwords plus a unique code generator operated by a 6 digit PIN for instructions!

Buying banking services is like buying any other service. You can look at websites and brochures, talk to people. How quickly and efficiently do you respond to phone calls and emails? That is always a good indicator. I have dealt with banks that will reply to foreign language emails within five minutes if you email them in the middle of the night at your local time, and others that simply never reply to emails, or specify on their websites that they will reply.” within five business days.” Well, that pretty much defeats the point of sending email, doesn’t it?

So, too, nothing is forever. If you receive poor service or hear rumors you don’t like, you can leave immediately. You should at least be able to. That’s something worth checking out too!